UPS (UPS -2.50%) will release its first-quarter earnings report on April 26, and it looks like there's more potential for negative news than positive news. That said, there's still a case for buying the stock and holding it for the long term, so the dynamics make UPS a "must-watch" stock this month, not least for investors looking to buy in on a dip.

UPS doesn't have a great record of meeting guidance

The logistics giant has failed to hit its initial full-year guidance targets for the last three years, and its current guidance could be under threat. More on the latter shortly. First, here's a recap of what happened over the last three years.

UPS management doesn't tend to provide specific guidance on earnings per share. Instead, it prefers to offer outlooks on its revenue and adjusted operating profit margin, from which you can calculate implied adjusted operating profit. UPS did not meet its revenue or implied adjusted operating profit guidance in each of the last three years.

Data source: UPS presentations.

It makes for sorry reading, and much of that underperformance comes down to a combination of factors.

• A slower-than-anticipated economy (not helped by rising interest rates) led management to overestimate demand for small package shipping.
• The correction from the boom years in shipping activity caused by the COVID lockdowns was stronger than many anticipated, and the industrywide capacity expansion in response to that pandemic boom left it with overcapacity in its wake.
• An extended labor dispute in 2023 led many UPS customers to shift shipping to other delivery networks due to fears that its workers would strike.

In short, it failed to meet its guidance numbers for somewhat understandable reasons; it's difficult to accurately predict interest rate movements or how the economy will respond to them, and it takes two to tango when it comes to labor contracts. Still, rightly or wrongly, the buck stops with management, and investors' patience has its limits. Moreover, that patience will likely be tested again this year, too.

Why UPS could miss in 2025 as well

Fast-forward to 2025 and pressures are building that could lead to a significant disappointment at UPS -- one that could sap its highly prized dividend, which at the current share price yields almost 6%. Several bellwether industrial companies have recently spoken of weakness in the U.S. economy. For example, 3M walked back its first-quarter revenue guidance on the back of order push-outs in March, mainly due to its short-cycle businesses, which react first to a slowdown.

Delta Air Lines and United Airlines have both served notice of a weakening in demand, and to cap it all, UPS' rival FedEx also cut its full-year revenue and earnings guidance based on weakness in the U.S. industrial economy, which is taking a toll on business-to-business (B2B) deliveries.

That's a particular concern because B2B deliveries tend to be a higher-margin activity. If they slow down, that could lead to margin contraction for UPS. In addition, a potential decline in delivery volumes overall could complicate an already complex situation -- UPS is trying to finesse the impact of its decision to reduce the volume of Amazon deliveries it handles by 50% before the end of 2026.

Image source: Getty Images.

UPS could cut its dividend

Management's current 2025 guidance calls for free cash flow of $5.7 billion and total dividend payouts of $5.5 billion. The company also plans to spend $1 billion on stock buybacks. Barclays analyst Brandon Oglenski did inquire as to the prudence of those share repurchases, to which CEO Carol Tome replied that management had "talked about" debt financing the buybacks "because with the yield on the stock and the after-tax cost of the debt, it's a really good trade."

In other words, Tome's asserting that if you can borrow money at less than, say, 6%, it makes sense to use that debt to buy back stock because the company then won't have to pay a 6%-yielding dividend on those shares.

That's fair enough, but if UPS' free cash flow falls short of expectations (which could happen), then investors might not want to hear about the company increasing its debt load simply to pay dividends and buy back stock. Alternatively, management could decide to cut the dividend. Neither scenario is appealing over the near term.

Is UPS stock a buy?

The near-term risk is apparent and skewed to the downside. With all that said, investors shouldn't conclude that UPS isn't an attractive holding over the long term. Management's decision to reduce its low-margin Amazon-driven volume makes sense, and it continues to grow its higher-margin deliveries from healthcare companies and small- and medium-sized businesses while investing in productivity-enhancing technology such as automation.

As unpalatable as it sounds, a dividend cut might prove to be a catalyst for a healthy reset of investor expectations toward a company that has long-term growth prospects. That's something to consider as UPS prepares to navigate a difficult period.